As hourly billing falls out of favour, how do you replace it? We report on a presentation by pricing expert Richard Burcher
Much is said these days about moving away from hourly billing to “smart pricing” for clients, but what does that involve, and how is it done? The question was addressed in a recent Update seminar at which the principal speaker was pricing guru Richard Burcher.
Formerly managing partner of a law practice in his native New Zealand (a “thankless role”, he calls it), Burcher has long had a fascination with the pricing of legal services, and eventually set up a consultancy dedicated to the subject. The demand for its services brought him to the UK a couple of years ago.
With the recession, lawyers quickly learned to cut costs, but as Burcher says, that only takes you so far. Pricing intelligently is the “last great frontier” that many have still to conquer.
Death by discount
The arguments against hourly billing are well known. Among other things, it encourages inefficiency, and it leaves clients with no idea of their likely final bill – not a formula for good client relations, particularly in these cost-conscious days. But neither is it a good idea to discount fees in order to win business – to Burcher, it has no happy ending, but rather leads to a “slow and unhappy death”.
Indeed, while not the sole factor, he maintains that pricing incompetence is a common denominator in recent law firm failures. To put it another way, Burcher’s experience is that smarter pricing generally produces a 5-15% increase in turnover. That goes straight to bottom line. So if you achieve a mid-range 8% improvement, and your normal net profit is 25%, that means profits go up by 32%. Conversely, he observes: “That’s why you shouldn’t be so sanguine about agreeing, say a 10% fee discount.”
Three steps to intelligence
How, then, do you start? Burcher’s threepronged approach is: some rules for who does the pricing; the necessary management information; and the communication with the client.
For the first, Burcher emphasises the need for firm control from the top. Why, he asks, allow a decision-making role to people with no vested interest in the profitability of a business, such as non-equity partners? Admittedly, it takes time to review estimates and bills before they are sent out, but, he insists, you generate more money for your firm by taking the time to do that than by doing the equivalent amount of chargeable work.
“Anything less than a vigorous and forthright approach will result in any attempt to improve the firm’s profitability through more sophisticated pricing, floundering,” he adds.
His own firm had a “two pairs of eyes” policy so that no one sent out a pricing proposal without at least one colleague running an eye over it.
“It’s a combination of art and science,” he comments. “Two heads are almost always better than one. It’s easy for one person to lose objectivity.”
Capabilities in relation to the second leg may well depend on your practice management software: one of the most important things it should be able to do, Burcher asserts, is provide some insight here. You need to be able to understand your profit, measured by practice area, fee earner, client and file/matter. Do you have “sacred cow” clients who have been on fixed hourly rates for too long? Are they really worth keeping? Your management information must provide “actionable insights”, or it is pointless.
For the third, Burcher’s theme is “Price the client”, or put another way, “Never price in a vacuum”. Clients, he believes, divide into four types: “price buyers”, who always go for the lowest offer and who you should service as cheaply as possible; “value buyers”, who do not look at price alone, but are not deeply embedded with the firm and should be given “fair but not keen” pricing; “poker players”, who may need their bluff called over, say, whether they will only do business at a discount; and the best type, “relationship buyers”, who are willing to pay for enhanced service.
Whatever type you have, the familiar rules apply about scoping the transaction – what is excluded as well as what is included – and managing client expectations. And if something unexpected comes up, that is the time for a pricing conversation – not afterwards, when the client doesn’t need you any more.
“Think of the phone call from the garage when your car is in!” Burcher advises.
Give them some ownership
He also believes many firms take the wrong approach to their client care documents. Those that are driven by regulatory, compliance and limitation of liability considerations are “the opposite of client-friendly communication”. Clients want to know what you are going to do, who will do it, by when, and how much will it cost. In plain terms. Not about your complaints procedures.
“We put the mandatory disclosure stuff on our website,” he explains.
As for the pricing proposal itself, why not give the client a choice? Providing pricing and payment options, showing greater transparency, giving them involvement in the pricing decision.
“This is what contributes most to a reduction in cost complaints,” Burcher assures us. “Don’t assume that a client who says ‘Yes’ to a proposal is happy. Acquiescence is not good enough.”
All these variations are quite compatible with proper service levels: “You should have a minimum standard, but above that there is more room for manoeuvre than you think.” And why not offer alternative prices depending on who would do the work?
There is no reason why your options, whatever your line of work, can’t include fixed fees. The question is, how much risk is there – and you price that in. The fixed fee may be high! It’s up to the client whether they choose that or your alternative rate – your line with them is: “If you want us to take the risk, that’s the price.”
Everyone can adopt smarter pricing, Burcher emphasises, though how it is executed depends on the size of your firm – reflecting his point about exercising control over the process.
At the end of the day, pricing is “a skill, not a mindless administrative function”. As such, it takes practice, and sometimes getting it wrong. But if it delivers that increase in net profit, it’s probably worth the effort.
Richard Burcher is managing director of Validatum www.validatum.com | e: email@example.com